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CAIE AS LEVEL
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Definition -> The total demand for a particular product in

1. The Price System & the the market
Purpose -> Shows the relationship between market
Microeconomy demand and the price of a product
Calculation -> Adding together the quantity demanded of
each individual at any given price
1.1. Demand & Supply Curves
Supply
Effective Demand
Definition -> The quantity of a good a producer is willing
Definition -> The quantity of a good or service an individual and able to offer for sale over a range of prices, over a
is willing and able to purchase over a range of prices over a given period of time
period of time. Determining the Equilibrium Price and Quantity -> One
Desire for a Product -> Must be backed up with the must evaluate both demand and supply curves of a
ability to pay for it product.
Important Note -> You must distinguish an individual’s Individual Supply -> Relationship between an individual
demand for a product from the desire or need for a producer’s supply and the price for a product
product Law of Supply -> For most goods and services, the quantity
Eg. an Individual wants a Ferrari but can’t Afford It - supplied is directly proportional with its price.
> Economics states that he does not have a demand for If Price Rises -> Quantity Supplied Rises
it If Price Falls -> Quantity Supplied Falls
Reason -> Individual may be willing but is not able to; Supply Curve -> Curve showing the relationship between
hence, Effective Demand is not met the quantity of a product producers are willing and able to
offer for sale over a range of prices, over a period of time
Demand Assuming Ceteris Paribus -> All other factors affecting
supply are held constant
Individual Demand -> Relationship between individual Illustrates the Law of Supply -> Relationship between
demand and the price for a product supply and price
Law of Demand -> For most goods and services, the
quantity demanded is inversely proportional to its price. Law of Supply Explanation
Demand Curve -> Curve showing the relationship between
the quantity of products individuals are willing and able to Higher Prices -> Producers are willing to supply more
buy over a range of prices over a period of time. because it is likely more profitable
Assuming Ceteris Paribus -> All other factors affecting Lack of Demand Curve -> We cannot determine the
demand are held constant quantity supplied and at what price
Illustrates the Law of Demand -> Relationship
between demand and price Market Supply
E.g. Demand for Tomatoes by Individual “Tom” Definition -> The total supply for a particular product in the
market
Assuming Ceteris Paribus -> All other factors affecting Purpose -> Shows the relationship between market supply
Tom’s demand for tomatoes remain constant and the price of a product
**Absence of the Supply Curve -> We cannot determine the Calculation -> Adding together the quantity supplied of
quantity demanded and the price each individual producer at each price

Market Demand Shift of the Curve v/s Movement Along Curve.

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CAIE AS LEVEL ECONOMICS
Good Good A & B Price of A Rises Price of A Falls Example
Relationship
Price -> Moves along the given curve (either supply or Good A’s demand falls Good A’s demand rises
They can replace each
demand curve) Substitutes other; alternatives ; Good B’s demand
rises
;Good B’s demand falls
|Coffee v/s Tea
Determinants of Demand/Supply -> Bring about changes They are consumed
together |Good A’s Good A’s demand
in the whole curve when these conditions change Complements demand falls ; Good B’s rises ;Good B’s
demand rises
Car and Gas Fuel
demand falls
Movement Along Curve is NOT the Same as Shift in
Curve 3) Tastes & Preferences
Movement Along Curve -> Either contractions or
extensions of demand/supply Individuals -> Unlikely to consume products they do not
Shift in Curve -> Movement of the whole curve due to like
changes in the determinants The More Attractive a Good Is -> The greater the demand
is likely to be
Determinants of Demand
Advertising -> Can influence individual’s tastes and
Price is NOT the Only Factor -> Other factors affect an preferences, hence influence the demand of a product
individual’s demand for a good/service
Conditions of Demand -> Affect how much an individual 4) Speculation
will demand at each price
Produce Shifts in Demand -> Either to right or left Individuals -> May buy products hoping their price will rise,
thus can profit when reselling it
1) Income Speculative Products -> Houses, Shares, Antiques, etc.
High Speculation of Rising Prices -> Demand is likely to
Normal Good -> Good whose demand rises as income rise
rises, and falls as income falls; most goods and services
Inferior Good -> Good whose demand falls as income rises, 5) Size, Age, Gender or Population
and rises as income falls
Reason -> Consumers usually opt for cheaper Population Size -> Generally directly proportional with
alternatives when their income is reduced demand for most goods and services
Eg. McDonald’s -> The least “well-off” opt for fast Age and Gender Fluctuations -> Influences the behaviour
food over real meals due to them being cheaper of demand for goods and services that have a specific
demographic
Type of Good Income Relationship Income Rises Income Falls Example
Normal Direct relationship Demand rises Demand falls Most goods Example -> Products targeted to the young or elderly,
Inferior Inverse relationship Demand falls Demand rises Fast food (eg. McDonald’s) or focused on either males or females

2) Price of Other Goods 6) Distribution of Income

Goods are Usually Related to One Another -> Either as Income Equality -> Demand for normal goods should
A)Substitutes or B)Complements increase
A) Substitutes -> Goods that are alternative to one another Income Inequality -> Demand for luxury goods (rich) and
; they can replace each other inferior goods (poor) should increase
Example -> Coffee v/s Tea Influence on Inferior and Luxury Goods -> Will
If Price of Tea Rises -> Tea’s demand is reduced, since depend on the nature of the change in distribution
individuals opt for coffee; Coffee’s demand rises
If Price of Tea Falls, -> Opposite happens Determinants of Supply
B) Complements -> Goods that are consumed together
Example -> Gas Fuel and Car Price is NOT the Only Factor -> Other factors affect an
If Price of Cars Rises -> Car’s demand will fall individual producer’s supply for a good/service
Fuel’s Demand Falls Too -> Since fuel’s demand is Conditions of Supply -> Affect how much an individual
likely inversely related to the price of cars producer will supply at each price
Produce Shifts in Supply -> Either to right or left

1) Costs of Production

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Conditions of Demand Conditions of Supply
Rise in Costs -> Supply curve should fall 1) Income 1) Costs of Production
2) Price of Other Goods // Relationship of Goods 2) Resource Availability
Reason -> Producers can offer less for sale at each price 3) Tastes & Preferences // Advertising 3) Climate Weather
Examples -> Cost of chips for making phones, salaries of 4) Speculation 4) Technology
5) Size, Age, Gender or Population 5) Government Regulation
office workers 6) Income Distribution 6) Taxes & Subsidies

2) Availability of Resources Shifts in the Demand Curve

More Availability -> Supply curve should rise If Any of the Conditions of Demand Change -> Demand
Eg. More Copper Deposits are Discovered -> Tech curve will shift according to the nature of the condition
industries can produce more electronic chips affected
Shift in Demand Curve -> Individuals are either able to
3) Climate purchase more or less of a product at each price
Shift to the Right -> Demand Grows ; individuals can
Does NOT Affect All Goods -> Only affects industries that buy more of a product at each price
are concerned with the weather Shift to the Left -> Demand Shrinks ; individuals can
Example -> Agriculture buy less of a product at each price
Bad Weather Conditions -> Supply curve should fall
Reason -> It reduces the ability to produce more crops Demand Condition Being Rise in Demand // Shift to the
Assessed Right
Fall in Demand // Shift to the
Left
Other Industries Impacted -> Construction, tourism, etc. 1) Income Normal Goods: Rise in Income; Normal Goods: Fall in Income;
Inferior Goods: Fall in Income Inferior Goods: Rise in Income
Substitute’s price rises; Substitute’s price falls;
2) Relationship of Goods Complement’s price falls
4) Technology Complement’s price rises
3) Tastes & Preferences More Advertising // Product
becomes more Attractive
Less Advertising // Product
becomes less Attractive
High Speculation that Good’s price High Speculation that Good’s price
Improvements in Technology -> Supply curve should rise 4) Speculation will Rise will fall
Reduction in Costs of Production -> Lets firms produce 5) Population
Increase in Good’s Target
Population |Fall in Good’s Target
more at each given price Population
More even distribution of income Less even distribution of income
Eg. New Machinery -> Might significantly increase tech 6) Income Distribution
(Income Equality) (Income Inequality)
industries’ ability to produce electronic chips
Shifts in the Supply Curve
5) Government Regulation
If Any of the Conditions of Supply Change, the Supply
Government’s Purpose/Aim -> Health and safety, curve will shift according to the nature of the condition
consumer welfare, legislation, etc. affected
Main Goal -> Protect employees from being exploited; Shift in Supply Curve -> Producers can purchase more or
equal pay and minimum wage less of a product at each price.
High Regulation -> Supply curve should fall Shift to the Right -> Supply Grows; individuals can buy
Reason -> Usually rises the costs of production or more of a product at each price.
reduces efficiency of FOPS Shift to the Left -> Supply Shrinks; individuals can buy
less of a product at each price
6) Taxes & Subsidies
Supply Condition Being Rise in Supply // Shift to the Fall in Supply // Shift to the Left
Assessed Right
Indirect Taxes -> Supply curve should fall 1) Costs of Production
Lower Wages // Cheaper Raw
Materials
Higher Wages // Expensive Raw
Materials
Reason -> Increases the costs of production for 2) Resource Availability Discovery of Ore Deposits Trade Embargoes
3) Climate Weather Optimum Weather Conditions Bad Weather Conditions
producers 4) Technology Improvements in Technology N/A
Subsidies -> Supply curve should rise 5) Government Regulation Minimum Government Excessive Government Regulation
Regulation
Reason -> Reduces the costs of production for 6) Taxes & Subsidies Less Taxes; More Subsidies More Taxes; Less Subsidies
producers; producers can supply more output at lower
prices 1.2. Price Elasticity, Income Elasticity &
Determinants of Demand & Supply Cross Elasticity of Demand

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CAIE AS LEVEL ECONOMICS

Price of Elasticity of Demand 1. Necessity -> Determines whether a good’s demand is

more likely to respond to a change in price
Definition -> Measures the responsiveness of a change in Necessary Goods -> Relatively Inelastic Demand,
demand to a change in price since even though prices rise consumers still need to
Formula -> PED = (%Change in Quantity Demanded) / consume those goods
(%Change in Price) Luxury Goods -> Relatively Elastic Demand, since
PED > 1 = Price Elastic -> The change in price leads to an they are not necessary
even bigger change in demand 2. Substitutes -> The amount of substitutes a good has
PED < 1 = Price Inelastic -> Demand is relatively can influence the elasticity
unresponsive to a change in price Several Substitutes -> Relatively Elastic Demand
PED = 1 = Unitary Elastic -> Change in demand is equal to Eg. Market for Bread -> Relatively Inelastic
the change in price Demand, since there are less substitutes for bread
PED = 0 = Perfectly Inelastic -> Demand does not change 3. Addictiveness -> More addictive goods have Relatively
when price changes Inelastic Demand, since consumers are addicted to
PED = ∞ = Perfectly Elastic -> Demand falls to zero when them
price changes; infinite change in demand Eg. Cigarettes -> Consumers continue demanding
them, even if price increases
Type of PED PED Value Shape
Perfectly Elastic PED = ∞ |Horizontal Line
4. Proportion of Income Spent on the Good ->
Elastic PED > 1 Less Steep Curve Influences consumers capability to afford the product,
Unitary Elastic
Inelastic
PED = 1
PED < 1
Hyperbola
More Steep Curve
hence its demand
Perfectly Inelastic PED = 0 Vertical Line Smaller Proportion -> Relatively Inelastic Demand
Greater Proportion -> Relatively Elastic Demand
Eg. Price of Bread Increases 5. Durability of the Good -> A good’s duration determines
how much consumers are willing to wait to buy another
Increase in Price -> 15% one
Decrease in Quantity Demanded -> -20% Longer Durability -> Relatively Elastic Demand
PED -> -20% / 15% = -1.33 6. Peak and Off-Peak Demand -> During peak times,
Ignore Whether Value is Positive or Negative -> Solely demand for tickets is Relatively Inelastic
consider the magnitude
Factor Being Assessed Elastic PED Inelastic PED
Magnitude = 1.33 -> 1.33 > 1, so PED is relatively price Necessary Goods; eg.
1) Necessity Luxury Goods; eg. travelling
elastic food/electricity
2) Substitute Several Substitutes; eg. phones Fewer Substitutes; eg. bread
Availability
Factors Influencing Price Elasticity of Demand 3) Addictiveness Less Addictive
4) Proportion of Income Greater Proportion; eg. car
More Addictive
Smaller Proportion; eg. magazine
5) Durability Longer Durability; eg. washing Shorter Durability; eg. food
machine
6) Peak and Off-Peak Off-Peak times Peak times

Point Price Elasticity of Demand

Definition -> Measures the price elasticity of demand at a
specific point on the demand curve instead of over a range
of it.
As Price Rises -> Point PED becomes more elastic, as
consumers become more sensitive to price changes
As Price Falls -> Point PED becomes more inelastic

Income Elasticity of Demand

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Definition -> Measures the responsiveness of a change in Price Elasticity of Supply

demand to a change in income
Formula -> YED = (%Change in Quantity Demanded) / Definition -> Measures the responsiveness of a change in
(%Change in Income) supply to a change in price
YED < 0 = Inferior Good -> As income increases, demand Formula -> PES = (%change in Quantity Supplied) /
decreases; consumers switch to better quality alternatives; (%change in Price)
inferior good demand is reduced PES > 1 = Elastic Supply -> Firms can increase supply quickly
YED > 1 = Luxury Good -> As income increases, an even at little cost
bigger increase in demand occurs; luxury good demand PES < 1 = Inelastic Supply -> Supply will be expensive for
increases firms, hence can not variate quickly
YED Value Type of Good Interpretation
PES = 0 = Perfectly Inelastic Supply -> Supply is fixed,
YED < 0 Inferior Good Demand decreases as Income increases ; consumers switch to hence any change in demand won’t change the current
better quality alternatives
Demand increases as Income increases ; consumers can buy supply
YED > 0 Normal Good more of the good PES = ∞ = Perfectly Elastic Supply -> Any quantity
YED > 1 Luxury Good Demand increases in a bigger proportion than income
demanded can be met without changing the price
Cross Elasticity of Demand Type of PES PES Value Shape
Perfectly Elastic PES = ∞ Horizontal Line
Elastic PES > 1 Less Steep Curve
Definition -> Measures the responsiveness of a change in Inelastic PES < 1 More Steep Curve
demand of one good, X, to a change in price of another Perfectly Inelastic PES = 0 Vertical Line
good, Y
Formula -> XED = (%change in X’s Quantity Demanded) / Eg. the Price of Wheat Increases
(%change in Y’s Price)
XED < 0 = Complements -> If Y becomes more expensive, Increase in Price -> 15%
the quantity demanded of both goods falls Decrease in Quantity Demanded -> 20%
XED > 0 = Substitutes -> If Y becomes more expensive, the PES -> 20% / 15% = 1.33
quantity demanded of X rises; consumers switch to the Ignore Whether the Value is Positive or Negative ->
alternative Solely consider the magnitude
XED = 0 = No Relationship -> Goods have no kind of Magnitude = 1.33 -> 1.33 > 1, so PES is relatively price
relationship or influence on each other’s demand elastic

XED Feature Interpretation Application

Degree of change between
Factors Influencing Price Elasticity of Supply
Greater Magnitude (farther Stronger relationship between demands of both goods is
from 0) goods much more significant
Smaller Magnitude(closer to 0) Degree of change between
Weaker relationship between demands of both goods is less
goods significant
If Good Y becomes more
Positive Sign (+) Substitutes expensive; demand of Good X
rises
If Good Y becomes more
Negative Sign (-) Complements expensive, demand of both
goods falls
No Relationship (between both Variations in Good Y’s price
XED = 0 Goods) have no effect in Good X’s
demand

Type of Formula Sign (+ or -) Purpose

Elasticity
PED PED = (%ΔQd) / (%ΔPrice) Must be ignored Optimising
taxation
prices for revenue and

YED YED = (%ΔQd) / (%ΔIncome) Must be Determining type of Good

Considered (inferior, normal or luxury)
YED = (%Δ Good X’s Qd) / (%Δ Must be Determining relationship between
XED Good Y’s Price) Considered goods (complements or
substitutes)

1.3. Price Elasticity of Supply

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1. Time Scale -> Determines whether a good’s supply is Definition -> When supply meets demand; shown by P* Qd
more likely to respond to a change in price in the graph below
Short Run -> Price Inelastic Supply, since producers Price has No Tendency for Change -> Since producers are
cannot quickly increase supply meeting consumers’ demand
Long Run -> Price Elastic Supply Market Disequilibrium -> Whenever supply is not equal to
2. Spare Capacity -> Availability of resources determines demand; 2 scenarios: 1)Surplus or 2)Shortage
whether producers can supply more or less of their Surplus -> Occurs when supply exceeds demand;
product excess supply (blue line in graph)
Full Capacity -> Price Inelastic Supply, since there is Shortage -> Occurs when demand exceeds supply;
no spare resources left to increase supply excess demand red line in graph)
Spare Resources -> Price Elastic Supply, since there
are lots of spare and unemployed resources Relationships Between Different Markets
Market
3. Level of Stocks -> Amount of storage determines Relationship Definition Example

whether producers can allow themselves to increase 1) Joint Demand When goods are complements
**Gas Fuel & Car:**Increase in Car
demand is likely to lead to an increase
(goods that are bought together)
supply in the demand for gas fuel |
2) Alternative When goods are substitutes (goods **iPhone v/s Samsung:**Increase in
Storable Goods -> Price Elastic Supply, since firms Demand that are alternatives for each other) iPhone demand is likely to lead to a fall
in the demand for Samsung phones |
can allow themselves to stock additional supply When the demand for a good **PC’s & Microchips:**Increase in PCs’
3) Derived Demand produces a corresponding demand demand is likely to lead to an increase
Perishable Goods -> Price Inelastic Supply,s since for another related good in the demand for microchips |
firms cannot stock them for long When increasing the supply of one **Lamb Supply & Wool
Supply:**Increase in Lamb supply is
4) Joint Supply good influences the supply of
4. Flexibility of Factors of Production -> Determines another good likely to lead to an increase in the
supply of wool |
whether producers can reallocate their resources to
where extra supply is needed The Price Mechanism // The Invisible Hand
Flexible FOPS -> Price Elastic Supply
Fixed FOPS -> Price Inelastic Supply Price has 3 Main Functions -> Rationing, Signalling, and
5. Market Barriers of Entry -> Determines the Incentivising
accessibility that producers have to enter a brand new A)Rationing -> Price increases by default when resources
market/industry are scarce
Higher Entry Barriers -> Price Inelastic Supply; Increase in Price -> Discourages demand, consequently
producers struggle to enter into the product’s rations resources
market Eg. Plane Ticket Rise as Seats are Sold -> Because
Lower Entry barriers -> Price Elastic Supply spaces are running out
Disincentive to Purchase the Tickets -> Results in
Factor Being Assessed Elastic PES Inelastic PES
1) Time Scale Long Run Short Run rationing the tickets
2) Spare Capacity Spare Resources Full Capacity B)Signalling -> Price acts as a signal to consumers and new
3) Level of Stocks Storable Goods Perishable Goods
4) Flexibility of Factors of Production Flexible FOPS Fixed FOPS firms entering the market
5) Market Barriers to Entry Lower Entry Barriers Higher Entry Barriers Price Variations -> Indicate where resources are
needed in the market
1.4. Interaction of Demand and Supply C)Incentivising -> Consumers can inform producers the
products they desire by making choices
Market Equilibrium High Prices -> Encourage firms to increase their output,
since they can make more profit
Low Demand -> Results in lower prices, which
disincentivize firms’ output production

1.5. Consumer and Producer Surplus

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CAIE AS LEVEL ECONOMICS

Consumer Surplus
Definition -> The difference between the price the
consumer is willing and able to pay and the price they
actually pay
Basis -> What the consumer perceives their private benefit
will be from consuming the good
Location in Graph -> Area above market price and below
the demand curve
Law of Diminishing Marginal Utility -> Consumer surplus
generally declines with each extra unit consumed
Extra Unit -> Generates less utility than the one already
consumed
Main Outcome -> Consumers are willing to pay less for
extra units
Inelastic Demand Curves -> Have larger consumer
surplus, since consumers are willing to pay much higher
prices to consume the good
Increasing Consumer Surplus -> Either a)Rise in Demand
or b)Rise in Supply
Decreasing Consumer Surplus -> Either b)Fall in Demand
or b)Fall in Supply

Producer Surplus
Definition -> The difference between the price the
producer is willing to charge and the price they actually
charge
Basis -> The private benefit gained by the producer that
covers their cost
Measurement -> Profit
Location in Graph -> Area below the market price and
above the supply curve
Increasing Producer Surplus -> Either a)Rise in Supply or
b)Rise in Demand
Decreasing Producer Surplus -> Either a)Fall in Supply or
b)Fall in Demand

Economic Welfare
Definition -> The total benefit society receives from an
economic transaction
Calculation -> Area of producer and consumer surplus
added together
Importance -> When considering the effects of
Government Intervention

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CAIE AS LEVEL
ECONOMICS (9708)
THEORY

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